Botswana Economic Outlook
- The economy recovered in 2016 to 2.9%, driven by the rebound in the global diamond market.
- Growth prospects remain favourable but crucially depend on continued rebound in the global diamond market, improved reliability in electricity and water supply, as well as reforms.
- Reducing vulnerability to adverse shocks will require accelerating the pace of reforms aimed at enhancing competitiveness and improving the business climate to promote industrialisation and entrepreneurship.
Botswana has experienced boom-bust cycles, two of which have occurred since the turn of this century. The economy recovered in 2016, after it suffered another setback when economic growth contracted in 2015 because of weak demand for diamond exports and persistent electricity and water supply shortages. Domestic growth was boosted in 2016 by both the expansion of mining activity, reflecting the recovery in diamond industry, and a sound performance of nonmining sectors.
Botswana’s growth prospects for the medium term remain favourable. Medium-term growth is forecast to rise moderately. The continued recovery depends crucially on a continued rebound in the global diamond market, the expansion in construction activities in the context of the government’s Economic Stimulus Programme (ESP), improved reliability in electricity and water supply, and reforms to further improve the business environment. Downside risks remain elevated stemming from the sluggish recovery of the global economy and its impact on diamond demand.
The fiscal situation has weakened. After three consecutive years of surpluses, the fiscal position swung into a deficit in the 2015/16 financial year and another deficit is expected in FY 2016/17, reflecting lower mining revenues, a decline in revenues from the volatile South African Customs Union (SACU) and the continued use of fiscal stimulus. The government remains committed to returning the budget to surplus in the near term.
Inflationary pressures have eased sharply. Annual inflation closed below the lower end of the Bank of Botswana’s medium-term objective range of 3% to 6% in 2016. Key factors that have helped to drive down inflation include the drop in international fuel prices and the government’s commitment to prudent monetary policy. Inflation is expected to remain within the target range in the medium term, owing to low domestic demand and subdued foreign price developments.
To achieve economic diversification, Botswana needs to promote industrialisation by accelerating economic transformation from the primary sector to advanced manufacturing and services. Over the past four decades, the government has put in place appropriate policies and initiatives in support of industrial development and entrepreneurship. It has also stepped up efforts aimed at addressing various challenges investors and entrepreneurs face by pursuing measures aimed at reducing the cost of doing business and increasing competitiveness, as well as enhancing skills development.